Judge outlines tough standards in False Claims Act case

U.S. Magistrate Judge Thomas B. Smith faced a Florida medical center’s claims of privilege over a host of documents and communications that the government and a qui tam whistleblower sought for discovery in a False Claims Act lawsuit, and he struck them down one by one like dominoes, with few exceptions.

It was a victory for Elin Baklid-Kunz, director of physician services at Halifax Hospital Medical Center in Daytona Beach, Fla., who sued Halifax in 2009 under the qui tam provisions of the False Claims Act. She claimed Halifax submitted false and fraudulent Medicare/Medicaid claims and paid kickbacks to physicians. The government intervened in 2011.

Baklid-Kunz filed the lawsuit in the U.S. District Court for the Middle District of Florida in Tampa, and during the discovery process, United States of America, ex rel. Elin Baklid-Kunz v. Halifax Hospital Medical Center found itself before Smith on the privilege question. He gave the privilege claims a level of scrutiny not normally seen in a regular—i.e., not False Claims Act—civil litigation, says Brian Albritton, a partner at Phelps Dunbar and former U.S. attorney in Florida.

The resultant order is a reminder of the do’s and don’ts of protecting privilege in a False Claims Act case, notions that are useful even to companies not subject to False Claims Act actions.

“This case brings us back to what the privilege and the work-product doctrines really are: shields, not swords,” Albritton says. “It’s a wake-up call for corporate counsel and litigators who may have gotten slack in terms of how they protect the privilege or what they consider to be privileged.”

No Presumption

In-house counsel in particular should pay heed to Smith’s pronouncement that the standards for determining privilege apply differently to outside counsel and in-house corporate counsel, the latter of whom are today involved in all facets of the organizations they serve, not just the legal issues.

He outlined that communications between a corporate client and outside litigation counsel are cloaked with a presumption of privilege, but in-house lawyer communications “involve a much different dynamic” and must satisfy the primary purpose test, the principle that a client’s communications with a lawyer are privileged only if legal advice or assistance was the primary purpose of the communication.

“[Cases such as Halifax] counsel for companies to engage outside counsel sooner as opposed to later and let them control the flow of information about the litigation,” says Fried Frank Partner Douglas Baruch. “When outside litigation counsel has been engaged, it’s much easier for a court to uphold the privilege in those circumstances. When it’s a business lawyer who is routinely involved in business decisions, it’s much harder for the court to parse those types of communications.”

Rubber-Stamped

Smith took representative samples of the seven categories of documents in question, which included documents, communications and a log that the medical center’s compliance department kept regarding potential compliance issues. His assessment of them led him to state in the order, “A document is not privileged simply because the custodian wants it to be or because it is marked as such.”

Halifax got slack by relying too heavily on a rubber-stamp approach to privilege and losing sight of the primary purpose test. The company marked documents as attorney-client work product or carbon-copied lawyers on email chains. When Smith reviewed the documents, however, he found over and over again that they were not privileged.

For example, he found that the referral log was not created to seek or receive legal advice, so labeling its pages as work product was “immaterial.” Smith also deemed an email that a Halifax in-house lawyer received not privileged because it was sent not to request or transmit legal advice but to keep that lawyer apprised of a human resources situation. Further, he found that “for the most part,” documents concerning internal audits carried out by any department other than legal were not privileged as Halifax had asserted.

Compliance Log

One of the key documents Smith analyzed was the compliance referral log. Halifax’s compliance director said the log facilitated his discussions with Halifax’s general counsel and legal department.

Smith ordered Halifax to produce it. “In no instance has a lawyer commented on the information recorded nor has an employee in the Compliance Department indicated that he or she would seek advice of counsel,” he wrote.

Smith also was not convinced by Halifax’s argument that certain documents were privileged because they sought or rendered compliance advice and Halifax’s legal department oversaw the compliance department, writing that Halifax’s structure is of no consequence and the primary purpose test went unmet.

When Smith released his order, Daniel Plunkett, a member in McGlinchey Stafford, says he and other practitioners initially found it to be “a really tough result.” After a closer look, he found that Smith fell mostly in line with established case law.

“It’s evolutionary, not revolutionary. … These issues have been percolating for a while,” he says.